Clearing the waters of BP’s oil will take years but we should not take years to clear the waters of socially responsible investing. BP’s stock was held by many socially responsible mutual funds before the April 2010 spill, including Pax World which professes sustainable investing. Pax cleansed itself of BP after the spill, selling its shares. The Dow Jones Sustainability Indexes (DJSI) branded BP “Sustainability Leader” in the years before the spill and wrote that “BP is leading its peers in corporate sustainability and is committed to shaping the oil and gas industry in the social and environmental aspects of business…Eco-efficiency indicators show that BP delivers well on its lower carbon growth strategy by increasing production whilst stabilizing greenhouse gas emissions.” DJSI cleansed itself of BP by expelling it from its indexes after the spill, writing that “The extent of the oil-spill catastrophe in the Gulf of Mexico and its foreseeable long-term effects on the environment and the local population – in addition to the economic effects and the long-term damage to the reputation of the company – were included in the analysis leading up to BP’s removal.”
The origins of the social responsibility investment movements are in values, most often rooted in religion. Weapons and slavery offended the religious tenets of the Quakers who settled North America, and the Quakers refused to invest in them. We know the screens used by the Quakers as “negative screens,” aimed at excluding companies that offend particular values of investors without regard to the cost of such exclusion. The original socially responsible investors were modest in their expectations from such investments. The provost of a Quaker college was asked why his college does not invest in manufacturers of armaments. Did the college’s board of trustees think it was going to stop the armament building? “No,” he responded, “our board isn’t out to change the world. We’re seeking oneness between ourselves and our Lord.”
Values differ and negative screens vary along with them. The Amana funds screen out interest-paying investments, such as bonds, because they violate the Islamic prohibition on interest or riba. The Ave Maria Catholic Values fund screens out stocks of companies associated with contraceptives, abortions, or benefits to unmarried partners of employees. Ave Maria disposed of the stock of the Eli Lilly pharmaceutical company when it began offering benefits to unmarried partners of its employees. Yet Eli Lilly would not have been excluded by Meyers Pride Value Fund which appealed to investors eager for inclusive policies toward gays and lesbians.
Socially responsible investing with negative screens is easy. We can exclude stocks of tobacco, alcohol, or gambling. We can even exclude all three. But complications arise when positive screens augment negative ones. Positive screens confer preferences on companies with positive characteristics, such as good employee relations, solid environmental records, or strong corporate governance. But positive screen open the door to critics. Paul Hawken, the co-founder of Smith & Hawken, criticized the Domini fund for straying away from purity by including in its portfolio companies such as McDonald’s, but Amy Domini defended her inclusion of McDonald’s as a good choice, even if an imperfect one. “I personally may prefer slow food to fast food. I personally prefer the ambiance of organic over non-organic. But I don’t have a mandate from the public to avoid fast food… When I look at McDonald’s versus [other companies in] the fast-food industry, I see them on a path toward human dignity and environmental sustainability. I can live with myself for investing in McDonald’s.”
It is easy to empathize with Amy Domini. After all, we would have no friends if we insisted on associating only with perfect ones. Indeed, we would not have us as our own friends if we were to demand perfection. Corporations are no more perfect than people. Anadarko Petroleum had a very low overall score on social responsibility by the criteria of community, corporate governance, diversity, employee relations, environment, human rights, and products. Xerox had a very high overall score and so did IBM. Yet Anadarko’s score on employee relations was better than Xerox’s and its score on corporate governance was better than IBM’s. Socially responsibly funds cannot choose perfect companies because perfect companies do not exist. Instead, they choose good companies. Yet people perceive the selection of a company into socially responsible funds as a ‘perfect company seal’ and stand ready to ridicule funds when one their stocks, such as BP, turns out to be less than perfect.
The socially responsible community can free itself from its bind by returning to its negative screens origins, abandoning positive screens. A mutual fund which includes BP because it has a solid environmental record will be embarrassed by news that BP is responsible for an oil spill, but a mutual fund which excludes Altria because it produces cigarettes would never be embarrassed by news that news that Altria also has good employee relations or high stock returns.
We can create a suite of low-cost index funds with negative screens appealing to particular groups of investors. One fund might exclude interest paying companies, another might excludes companies producing contraceptives, yet another might exclude companies producing tobacco. Successful funds will combine exclusions that appeal to large enough investors segments. A fund that excludes tobacco, alcohol and gambling might succeed, but one that excludes both alcohol and contraceptives might not. Socially responsible investors would save a lot of money with such low-cost index funds, money they can use to change the world.